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Comments on the 2012/13 DoRB

Standing and Select Committees on Appropriations

28 February 2012

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1. Past Budget Forum Inputs

2. 2012 MTEF LG Fiscal Framework

3. 2012 MTEF Division of Revenue

4. General Comments on LG Grants

5. Specific Comments on LG Grantsi. Local Government Equitable Share (LGES)

ii. Conditional Grants

6. Conclusion

Outline

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LEGISLATIVE AND POLICY CONSTRAINTS IMPACTING LG REVENUE MANAGEMENT

•Ad-hoc national policies and legislative amendments are constraining own revenue sustainability, e.g.:

– AARTO is not functional and costs money

– rates ratios for categories of properties in terms of the MPRA

– NERSA tariff processes are not fully aligned to MFMA budget process

– Enforcing Credit Control in Eskom supplied areas

•National and Provincial governments must commit to pay outstanding property rates to municipalities

•Report net debtors and not gross debtors

•Provide support and guidance for debtors management and writing off irrecoverable debt

Past Budget Forum Inputs (1)

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LG Fiscal Framework• Investigate the relationship between district and local

municipalities• Build the capacity of weaker municipalities to spend efficiently

and effectively• Increase funding for Institutional costs of smaller municipalities• Address Unfunded Mandates• Improve funding arrangements for repairs and maintenance• Undertake empirical studies into the cost of service delivery in

LG to inform decisions about the vertical share of revenue• Such studies should underpin the LG fiscal framework review

Past Budget Forum Inputs (2)

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2012 MTEFLG Fiscal Framework

• Commitment towards protecting the value of transfers to LG is noted – SALGA welcomes the total of R5.3 billion added to LG allocations over the

2012 MTEF

• SALGA understands that additional funding is made available for:– Governance and Administration costs in poor municipalities (Ward

Committees)

– Anticipated increases in the costs of basic services in outer years of 2012 MTEF

– Upgrading of informal settlements

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2012 MTEFDivision of Revenue (1)

Division of nationally raised revenue, 2008/09-2014/15R million 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15Local GovernmentEquitable Share 25 560 23 845 30 541 32 876 37 873 40 582 43 639General Fuel Levy Sharing 0 6 800 7 542 8 573 9 040 9 613 10 190Conditional Grants 19 928 20 892 22 821 26 732 30 429 33 663 36 878Total 45 488 51 537 60 904 68 181 77 342 83 858 90 707% Share of Nationally raised revenueNational 49.7% 50% 48.1% 47.1% 47.2% 47.4% 47.6%Provincial 42.4% 43% 43.7% 44.5% 44.0% 43.7% 43.4%Local Government 7.8% 7.5% 8.2% 8.4% 8.8% 8.9% 9.0%

• increasing from a low base• response to high electricity prices• municipal revenue collection affected

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2012 MTEFDivision of Revenue (2)

• Provision for infrastructure investments of R109 bn over MTEF, but not equal support for repairs and maintenance

• Fiscal framework does not fully provide for LG functions (including agency functions)– unfunded mandates in health, libraries, museums, roads– housing and transport to be allocated to municipalities

• LG revenue will still be under pressure• Indirect grants to LG requires consultation with municipalities on

how spending will unfold or with SALGA

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• The adjustments to LG grants are not fully understood– tables in Annexure W1 are complicated

• not easy to follow steps from savings, revisions and additions to net effect

– there is no explanation given why certain grant baselines are reduced

• e.g. the Neighbourhood Development Partnership is reduced, but

• why not improving the grant policy and processes rather

General Comments on LG Grants

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• Local Government Equitable Share• Conditional Grants

− General comments− Infrastructure Grants− Capacity Building and Other Grants

Specific Comments

on LG Grants

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• The additional R2.2 billion added over the 2012 MTEF is noted– However, this is about a 10% increase to the total LGES allocation

– This increase is therefore a pass on cost in relation to Salaries and Bulk Services (meaning not net increase for LG Budgets)

• There is a need for more transparency on how the LGES is calculated – e.g. it is not clear what the break down is of the basic services cost parameters (as in

Annexure W1)

– i.e. the break down between bulk costs, repairs and maintenance and overhead costs that free basic services subsidies are intended to cover?

• Absence of this information makes it difficult to understand to what extent the stated increases in the LGES baseline covers each of those cost drivers

• e.g. how does the R2.2 billion increase in the LGES baseline covers the combination of increases in bulk costs, repairs and maintenance and overhead costs across water, sanitation, refuse removal, electricity, and municipal health services?

Equitable Share (1)

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• Rising cost of bulk services and demand for basic services requires higher than inflation increases to the LGES

– The table below indicates slow growth in the Electricity portion of the total Basic Services Component

−basic services provision is gradually becoming unaffordable to municipalities

−municipalities have to provide for repairs and maintenance of infrastructure through which free basic services are delivered

Municipal indigent support is under threat!

• It is not clear how the actual average monthly electricity subsidy of R208 per poor household given in Annexure W1 cover these increases, since:

– the true break down of cost parameters are unknown, no indication of the range of subsidy levels to indicate different municipal contexts, and Census 2001 numbers are used to average

Equitable Share (2)

Budget Year

Electricity portion of LGES Basic Services

Component R million

Annual Growth

Eskom Bulk Tariff

Increase2011/12 9 512 26.7%2012/13 10 538 10.8% 27.1%2013/14 11 294 7.2% 25%2014/15 12 144 7.5% 25%

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• SALGA notes the funding provided for Ward Committees over the MTEF

– This will assist improvement in local governance

– However, are structural budget challenges of rural municipalities properly covered by the Institutional Component?

• SALGA notes the review of the formula that is underway and will continue to participate in the review process that should result in:

– a more equitable distribution of funds between different municipalities based on their varying fiscal capacities (principle of differentiation)

– a new poverty line

– more municipal services covered (e.g. fire-fighting and storm water drainage systems, etc)

– proper funding for rural municipalities

– a functioning development component (SALGA has called for this in past BFs)

Equitable Share (3)

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• Local Government Equitable Share• Conditional Grants

− General comments− Infrastructure Grants− Capacity Building and Other Grants

Specific Comments

on LG Grants

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• SALGA notes the additional R3.1 billion for direct transfers and R2.4 billion for in-direct transfers to municipalities for:

– upgrading of informal settlements in cities and large towns

– bulk infrastructure and solid waste management in rural municipalities

– electricity demand side management

• General Concerns− limited understanding of how non-formula driven municipal allocations are determined,

except through allocation criteria in grant frameworks

− reporting systems on grants needs further improvement and streamlining

− there is no comprehensive report on the non-financial performance of conditional grants to local government. The unavailability of such information affects policy decisions

− reports on spending of conditional grants also do not describe the reasons for under-spending and therefore further complicates policy decisions

− national and provincial government must assist municipalities in securing technical capacity to successfully plan and execute projects funded through grants

General comments on Conditional Grants

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Municipal Infrastructure Grant• 15% Ring-fencing for Sport and Recreation

– some municipalities do not have significant backlogs and the 15% would not suit their spatial plans

• such municipalities receive a very small amount of MIG and would not

be able to build a multi-purpose complex. – SALGA recommends that in the long term a conditional grant

with a maintenance and backlogs consideration should be considered for all infrastructure grants.

– A comprehensive review to include social services is needed.

Infrastructure Grants (1)

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Rural Households Infrastructure Grant• The grant should be incorporated sooner than 2014/15 as it should have been part of

MIG already

• It is funding projects that municipalities should be undertaking themselves rather than through the Department of Human Settlements

• It is not a special project that could be centrally administered (compared to the eradication of bucket system)

• However:

– Shifting of the grant does not solve the underlying problem of under-performance

– There needs to be an understanding of why the grant could not perform as envisaged

– Otherwise, we’re not dealing with the real problem, but only the shifting of the flow of funds from one department to another

Infrastructure Grants (2)

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Integrated National Electrification Programme Grant•Government should consider allowing municipalities to use this grant to electrify households, especially in rural areas, by means of renewable energy

– e.g. supply of lights in homes by means of solar energy through the use of photo voltaic panels

– in the long run, the households, whether they are connected to the grid or not, will spend less on electricity as some of this electricity will be supplied through solar energy

Infrastructure Grants (3)

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Regional Bulk Infrastructure Grant• The grant implementation should be clarified given that there is

no common understanding and definition of what constitute potable bulk water infrastructure in the water sector

• There is no clarity between DWA, Water Boards and Municipalities, on who funds what type of bulk water projects

• SALGA recommends that discussions be held on this to determine a proper flow of funding for bulk water infrastructure solutions

Infrastructure Grants (4)

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Electricity Demand Side Management Grant

• The extension of this grant over the MTEF is welcomed

• Process for approval of 2013/14 Business Plan

– the format and requirements for proposals must be clearly communicated to municipalities well in advance of the closing date of 3 September 2012 for proposals

– it will be beneficial to municipalities if they are allowed to implement projects in the residential and commercial sectors and not only in municipal operations. Examples of the types of interventions which can be implemented in the residential sectors are ripple control and solar water heaters

• Municipalities should also be allowed to implement renewable energy interventions such as photo voltaics as part of this grant

Capacity Building and Other Grants (1)

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Municipal Disaster Grant

• SALGA welcomes this funding, but government needs to increase municipalities’ awareness of this

• Municipalities are reluctant to declare a disaster because they often do not have funding to provide initial responses to disasters

– too often municipalities are not reimbursed for disaster responses or not to the value of their initial spending

• Increased funding should be allocated for both risk reduction infrastructure and disaster response

Capacity Building and Other Grants (2)

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Integrated EPWP Grant for Municipalities

• SALGA supports the specific grant focus areas as they are aligned to the LG Mandate

• EPWP should be seen as a subset of IDP and MIG projects

• We welcome the 15% allowed for project management and admin/capturing

• The reporting system as previously indicated is complicated and needs to be simplified

– Once again there is a one size fits all

– This is according to SALGA the reason for under-reporting on EPWP by smaller municipalities

• The DORA should include targets of municipalities reporting for the next 3 years

• SALGA would recommend using the CRDP nodes to focus on the job creation efforts

Capacity Building and Other Grants (3)

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Integrated EPWP Grant for Municipalities (continues)

• The grant has changed from the Schedule 8 to a Schedule 6

• This means that the EPWP allocation in the current year is based on the last year’s numbers of jobs created

• If however, a municipality create more jobs in the current year they may be disadvantaged because they may not have the cash flow support as is currently the case.

• Currently they draw down as they create jobs.

• This may streamline management of the grant for NT and DPW but may also have an unintended consequence of a municipality targeting same number of jobs as created last year – due to the grant

Capacity Building and Other Grants (5)

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• SALGA acknowledges the tight fiscal stance amid the national and global economic challenges

• Point of SALGA interaction in Budget Process is too late resulting in limited time for inputs

• Need to improve municipalities’ awareness of grants• SALGA will impress upon its members to redirect

spending towards frontline services, and to reduce non-core and ineffective expenditure

Conclusion